Returns to Corn Farming and Ethanol Processing

As corn farmers fine-tune their equipment and head to the fields, many have concerns about the costs of production and prospects for profitable price levels. Through the winter many have crunched the numbers to determine their corn production costs, including fuels, fertilizer, herbicides, seed, depreciation, anticipated repairs on equipment and land rent. The 2013 crop season was one fraught with production uncertainty in the form of meager soil moisture and continuation of adverse weather conditions; but in the end, a huge crop of corn with price-depressing effects was produced. Over the past long winter, there have been a series of demand-supply reports that have shown increasing levels of corn exports and greater use for ethanol production, offering some increases in prices. For tenants, corn prices still hover close to costs of production, depending on land rent.

Corn markets in the winter months are tempered by the understanding that the Upper Mississippi River is frozen, stopping the flow of corn to our most important export port, New Orleans. Rail movements of corn during the winter took the 2013 corn harvest from the Midwest to the West Coast for export to Asia and to domestic poultry and livestock feeders in SE United States and other areas. Truck traffic moves corn to ethanol plants and Midwest feeders; however, beef cattle on feed are fewer than in past years due to dry pastures and high hay prices over the last few years. With the opening of the Upper Mississippi and the price dampening effects of Southern Hemisphere corn production now understood, attention of the corn trade has shifted to the corn acreage intentions and field conditions faced by Midwest corn farmers. Those two factors will be dominant from this spring to the fall harvest.

In contrast to corn farmers, feeders of livestock, both domestic and foreign, and dairy producers are rejoicing at the cheap corn prices through the winter and going forward. Another group of corn consumers are ethanol plants, who have enjoyed excellent margins since the harvest of 2010. Many corn farmers are also stockholders in ethanol plants, so this is a great time to review the history of profits for corn farmers and corn ethanol plants.

The Agricultural Marketing Research Center (AgMRC) consisting of Don Hostrand, Robert Wisner and Ann Johanns at Iowa State University has maintained a very useful series of data on costs of production of corn in Iowa as well as modelled profits for typical ethanol plants since 2005 using farmer budgets and ethanol plant techno-economic models. Their data and analysis are regularly displayed in the Renewable Energy Newsletter.

Appearing in Figure 1 below is a graph produced by AgMRC that offers historic perspectives on profits of ethanol plants from 2005 to the present. Here one can see corn at the cost of production for the farmer, not the market price. This graph represents a period of dramatic changes in the ethanol business as that industry expanded rapidly in 2006-08 following the high profits that started at harvest time in 2005 as a consequence of Hurricane Katrina, which bottled up the Mississippi River and shut off corn exports through the Gulf of Mexico. Another effect of this natural disaster was to raise prices of ethanol and other petroleum products after damaging refineries and natural gas infrastructure on the Gulf Coast. Cheap, plentiful corn that couldn't be moved to export markets set the stage, along with for higher ethanol prices, for profits of $1.00 per gallon of ethanol produced for certain periods of time. By assuming the yield of 2.75 gallons of ethanol produced per bushel of corn, profits of $2.75 profit per bushel of corn processed resulted. However, good times rarely last for long in industries based on agricultural commodities.

Excellent profits between $.50 and $1.00 per gallon of ethanol remained until harvest of 2007 corn was delivered. In 2008 high ethanol prices kept ethanol plants very profitable until the financial crisis that started in the fall of 2008. Profits were zero or negative for ethanol plants from the harvest of 2008 until the harvest of 2010. Energy demand and ethanol demand were weak as the general economy staggered through this period that witnessed the bankruptcy and idling of about 10% of installed ethanol capacity in 2009. There were periods of losses in 2010 for ethanol plants before recovery to profitable levels with harvest of the 2010 crop. From the fall of 2010 until the present, margins have generally been positive for ethanol plants, with excellent returns since the harvest of the 2013 crop.

Appearing in Figure 2 is AgMRC's allocation of monthly supply chain profits for corn farmers and ethanol plants from 2005 to the present. The profits of corn farming and ethanol production run counter to each other because corn is by far the largest input in ethanol production. This modeled history shows how farmer investments in financially sound, well-managed ethanol plants can offset times of poor profits or losses in corn production, exactly as value-added enterprises are supposed to perform, overall. Profits in both corn farming and ethanol production require care at each step of each process. Corn farming requires the operator to manage weather, pest and market risks and still produce competitively priced crops. Processing of corn to ethanol requires plant management to manage substantial marketing risks in the procurement of corn and natural gas as well as the sales of ethanol and the by-product feed, distillers dried grains and solubles. Substantial efforts and vigilance are needed to monitor and coordinate performance of enzymes, yeast, centrifuges, evaporators, dryers, and distillation columns at top ethanol plants. Figure 2 confirms the historical wisdom of farmer investments in value-added enterprises that move and process their production toward the consumers.